Economic miracle of Singapore

MINISTRY OF SCIENCE, EDUCATION, YOUTH AND SPORTS OF UKRAINE

KHARKIV NATIONAL UNIVERSITY OF ECONOMICS

 

 

 

Department of foreign languages

 

 

Economic miracle of Singapore

 

 

 

 

 

 

 

 

 

                                                                                                                        Paper  by

                                                                                                                                              Shvartz Natasha

Student of Management and Marketing Faculty

                                                                                                                       ( 2-7)

                                                                                                                              Supervisior:

                                                                                                                                  Chebotar  E.F.

 

Kharkiv -2011

The topic of this research  is Economic miracle of Singapore.

Aim: To analyse reason of the rapid  growth of the Singapore economy.

Objectives: - to analyse literature about the given issue;

• to  learn the principles of economics and business of Singapore;
• to work out the possible ways of stabilize the economy of Ukraine;

                  

Novelty: Theoretical novelty of the paper lies in finding . Practical novelty

lies in application Singapore`s methods of developing economic situation in Ukraine.

Topicality: This topic is relevant because economic situation in Singapore is an example of rapid development without any natural resources.

Practical value: This research offers some possible ways of improving economic situation in Ukraine.

Structure of work: The paper consist of 8 parts,   pages.

 

 

 

 

 

 

 

 

 

Contents

Part I. General  principles of economic expansion…...........................................1

1. Transformation   ………………………………………………………………..1
2. «Clean hands»…………………………………………………………………..2
3. Science to become rich………………………………………………………….3

Part II. Recent growth record………………...………...…………….………….4

Part III. Development strategy…………..………...…………………....………..6

3.1 Development experience……………………………………………………..

3.2 Branching off…………………………………………………………………

Part IV. International competitiveness…………………………………………

Part V. Monetary system ..................................................................................

Part VI. Fiscal policy…………………………………………………………….

6.1 Tax policy……………………………………………………………………

6.2 Expenditure policy…………………………………………………………..

Part VII. Medium term prospects……………………………………………..

Part VIII. Corruption......................................................................................

8.1 Punishment for corruption…………………………………………………..

Conclusion………………………………………………………………………..

References………………………………………………………………………….

 

 

 

 

 

 

Part I. General  principles of economic expansion

Singapore officially becomes the most comfortable country for business, showing to the whole world the model of economic expansion without natural resources. In Singapore there is no oil, gas or ore. Moreover this country does not even have the  sand for building  and drinking-water. All these things have to be imported.

In spite of scarcity of resources, and minerals, this country at the end of a 20 age accomplished a swift economic  breach, flying  up from a world bottom in the first five of countries on the level of GDP.

The main and unique tool of Singapore in the fight for own prosperity became particular conditions for making business. During the short interval of  time a country destroyed all of obstacles on the way of technologies and capital.

A bright demonstration of success of their work on a way to prosperity became the results of  Index of economic freedom research, published by the American fund of Hearltage  Foundation. Singapore once more took the second place in this global rating. In other words,  this Asian country in the earliest for making business.

Ukraine  in this prestige rating continued the free falling and stopped on a 164th place out of 179 possible.

International investors appreciate liberalism of Singapore. Banks and corporations from around the world aim to set the offices or even to open their headquarters in this country.

Today the experience of little Asian country becomes an example for poor and corrupted countries. Authorities of Singapore asset that their secret of prosperity is based on four pillars, the English language , low taxes, simple condition of making business and skilled officials. 

 

 

 1.1 Transformation

Only 45 years ago Singapore, one of the poorest states in the world, first in the history got its sovereignty. One and half centuries of British colonization remained behind.

The main source of profit is marine port. However and it is mainly utilized for the re-export of tin ore, rice, rubber from Malaysia, Indonesia and Thailand. But even freights could go away from an obsolete Singaporean economy at any moment.

Only for one generation Singapore changed greatly.  Its population increased in five times, attaining 5 mln. people. An average  salary is $ 4 thousands  a month. What was a deserted island   recently is compared to the business district of  New-York – Manhattan .

Lea Kuan Yu changed the former British colony of  Singapore into paradise for investors and hell for the violators of laws.

The question is how poor Singapore attracted a foreign capital in this remote edge? The first thing  that this state did was simplification of system and reduction of fiscal rates. Except low taxes it attracts multi-billion investments with favourable  conditions for making business. Setting a business in Singapore occupies only 4 days. For comparison, in Ukraine it can be handled for 27 days. All procedures are maximally simplified and aimed at the effective use of time.

1.2 «Clean hands»

For creating a proper civil service broke corruption in a country. Bribery control was very cruel, making  position of state official into the most high-paying  and desirable career . In 1994 the middle pay-envelope of the Singaporean ministers is set at  the level of the two thirds from a middle pay-envelope to forty eight most highly-paid employees of corporate  sector  of Singapore. Annual pay-envelope of member of government and judge is - $1 million. Salary of premiere – minister is - $2 million. It is five times higher than the salary of president  of the USA.

The selection of personnel for sivic service is done by an agency that fights against a corruption. It punishes officials caught on bribery severely, sends them to  prison without taking into account  their merits  for the country.

In 2010 Singapore took the third  place corruption rating which is published by international  organization Transparency International. Ukraine still frightens the business world with its 134th place. For Singaporeans a corruption is so unacceptable, that  they can refuse to conduct business in a country, where it is possible to come across.

1.3 Science to become rich

Singapore owes its prosperity to a maximal integration into an international context. During the first years of his independence, in 1965, a government proclaimed English as an official language, that helped to save integrity of Singapore.

In the end freedom of enterprise, elimination of corruption and integration in the international process of education took away the young Asian country on the top of young capitalism.   

 Part II. Recent growth record

After the successful take off by mid 1970s and except for falling into a deep air pocket in 1985/86 the Singapore economy recorded an impressive growth passage till the onset of the Asian Financial Crisis in mid 1997. Following the crisis came the electronics dip in 2001 followed by the SARS set back in 2003. Despite the rather gloomy atmosphere then the economy gathered steam quickly and started to accelerate by recording 8.8% growth rate in 2004 followed by a 6.6% in 2005 and 7.9% in 2006.

In terms sectoral performance, the manufacturing sector, as in the past, was the main driver of the accelerated growth; the sector grew by 11.5% in 2006 and contributed about 3 percentage points to the overall growth rate. The manufacturing sector has retained its dominance in the economy by contributing 27% to GDP in 2006. After a long period of stagnation, the construction sector started to pick up and grew by 2.7% in 2006 and contributed about 3% to GDP. The service sectors jointly accounted for about 63% of GDP in 2006 or 4.4 percentage points in the GDP growth rate. Overall, therefore, the growth was broad-based.

On the demand side, private consumption expenditure grew modestly by 2.5% in 2006. A puzzling scenario that has been unfolding in Singapore is that the private consumption expenditure share in GDP has been falling over the years. This share has fallen from 61% in 1970 to 40% in 2006. In general, private consumption expenditure is the most stable aggregate demand component and accounts for about two thirds of GDP in developed economics. As this built-in stabilizer gets eroded away, the economy’s growth path becomes more volatile because of the volatility of the other demand components, private investment expenditure and exports. Studies show that Singapore’s falling consumption share has resulted primarily from rising property and car prices; when these prices fall the consumption share tends to rise.

The total domestic demand recorded a healthy 6.6% growth in 2006 mainly because of a healthy growth of private investment expenditures propelled a healthy inflow of FDI.

More than 80% of net investment commitments in manufacturing are from foreign investors. In 2006, the manufacturing sector attracted S$8.8 billion worth net investment commitments, most of which were from EU, US, and Japanese investors.

The propeller of the Singapore economy has been the external demand; export of goods and services. In 2006 external demand grew by 10.4% and contributed 8.1 percentage points to the year’s GDP growth. In comparison, the total domestic demand contributed only 1.5 percentage points to the growth rate. The role of exports is well reflected in the exports to GDP ratio. In 2006 the merchandize exports to GDP ratio stood above 200% and the domestic merchandize exports (excluding re-exports) to GDP ratio stood above 100%. The major value adding export item is non-oil domestic (merchandize) exports (NODX), which accounted for 40% of total exports in 2005/06. A healthy trade balance outweighed negative service and capital/financial balances to yield a S$26 billion surplus which amounted to 12% of GDP in 2006. Singapore has enjoyed persistent balance of payments surpluses over many decades.

With the impressive recovery of the economy the labour market made substantial gains.

In 2006, a record number of 173,300 new jobs were created and as a result the unemployment rate fell further to 2.7% from a height of 4.0% in 2003. Service producing industries took the lion’s share by creating 110,700 new jobs followed by the manufacturing and construction sectors creating 62,600 and 40,900 new jobs respectively.

Despite the overall high growth the nominal wages grew only by 3.2% and real wages by mere 2.2%. The highest growth in nominal wages occurred in the real estate and leasing services (11.7% growth) followed by financial services 5.7%. The slow growth in nominal wages kept cost pressures down; in 2006 the economy wide unit labour cost index fell by 0.5% and the unit business cost index in manufacturing edged up slightly by 0.6%.

The first half of 2007 recorded a boom and frenzy. Propelled by the high growth performance, the property market awakened from a decade long slumber and re-entered a frenzy fuelling a bubble similar to that burst in 1996. Burgeoning tourism sector with 9.7 million visitors in 2006 and with another 5 million in the first half of 2007 has squeezed the hotel sector with visitors spilling over to many non-standard visiting lodges. Outbound travel faced a crunch as a result of demand outstripping the supply and created long waiting lists for flight bookings. The upbeat, however, rekindled the fears of a roller coaster ride for the Singapore economy.

Part III. Development strategy

3.1 Development Experience

Since self-government in 1959 and independence in 1965, Singapore has passed through a number of phases in its development process. The Government put in place strategic plans in 1960 (First Plan), 1980 (Second Plan), 1985 (Economic Committee Report), 1991 (Strategic Economic Plan), 1998 (Competitiveness Report), 1999 (Industry 21; Manpower 21), and 2002 (Economic Review Committee). Through a forward looking strategy the government of Singapore has responded to new economic challenges quickly and capitalized very well on the “first-mover” advantages.

Despite the current standing as a developed economy, the initial challenges that Singapore had to face were many. Although independent Singapore inherited an efficient entrepot trade system from its colonial masters, it also inherited a large pool of unemployed workers (with more than 10% of the labor force was unemployed in 1960), a low skilled workforce, and wretched housing conditions. The institutional structure that the Government put in place to address these issues, though evolved over time, continues to this day. The Government took initiatives to tackle these problems simultaneously. The education policy was geared towards training in skills that were needed for the emerging industries. The Housing Development Board (HDB) was set up in 1960 to provide adequate public housing at subsidized rates. The Economic Development Board (EDB) was set up in 1960 to spearhead the industrialization drive.

A major challenge for the Government was to transform Singapore from a re-export economy under the colonial regime to an export economy. This appeared to be an insurmountable task for three reasons. First, unlike Hong Kong and Taiwan, which benefited from an exodus of entrepreneurs from communist China to their shores, Singapore faced a severe dearth of industrial entrepreneurs (as opposed to commercial entrepreneurs) at the early stages of its industrialization. Second, the lack of domestic savings aggravated the situation further. Third, the regional markets for Singapore’s exports were not that viable because they were likely to impose trade barriers to help their own industries. This meant that Singapore had to look beyond the regional market.

The solution to these problems was to aggressively look for foreign direct investment (FDI) from the industrial world to build up the manufacturing base of Singapore. The foreign companies not only brought in investment and entrepreneurship they also brought with them the markets for their products. The Government made sure to make Singapore as attractive as possible for foreign investors by providing them not only with financial incentives such as tax breaks and accelerated depreciation allowances but also with a cordial labor force. This latter objective was achieved by diluting the power of militant labor unions and establishing the National Trade Union Congress (NTUC) that worked cooperatively with the Government and employers. The Government also mobilized domestic savings through the compulsory savings scheme under the Central Provident Fund (CPF), which the colonial administration started in 1955 initially for civil servants.

The basic structure thus laid down has continued to this day.

3.2 Branching Off

One important element of Singapore’s development strategy has been historical continuity and branching off. A serious mistake a number of newly independent countries made was to either cut off or weaken the colonial economic pipeline, and as a result fall into economic degradation. In the industrialization process Singapore did not break away from the trade system that it inherited from its colonial masters. In fact, entrepot trade still plays a very important role in Singapore. The value of re-exports has ballooned from S$3.3 billion in 1960 to S$204.2 billion in 2006. What has changed is the relative importance of entrepot trade in the economy. As a share of total exports, re-exports accounted for only 47% in 2006 as opposed to 94% in 1960. The country evolved rapidly from a re-export economy to a manufactured export economy.

Even within manufacturing, further branching off from electronics to other areas like chemicals and biomedical manufacturing (especially pharmaceuticals) has been taking place over the decade after the Asian Financial Crisis. In 2006 electronics accounted for 29% of manufacturing value added as opposed to more than 50% in 1995. With the emergence of chemicals and biomedical manufacturing also as key players with 14% and 25% of value added shares respectively in 2006, the manufacturing sector has become more broad based. Unlike the electronics production, chemicals and biomedical production are highly capital and skill intensive. In terms of employment in manufacturing in 2006 electronics absorbed 26% of the manufacturing workers whereas chemicals and biomedical sectors absorbed only 9%. For these sectors the Government has made heavy infrastructure investments in Biopolis and the Tuas Biomedical Park. These heavy investments are a calculated gamble that the Government decided to bid on.

With rising competition for manufacturing from low cost competitors, the Singapore Government embarked on a further branching off to new economic drivers; one among them was to develop an “external wing” and another was to develop Singapore as a regional service-hub. While both these were emerging as natural outcomes of Singapore’s development process, the former received special government attention in the early 1990s and the latter since about 2000.

Under the regionalization drive, the Government designed an incentive package for Singapore companies to invest in the region and beyond. Direct investment is an effective way to penetrate protected markets. The emerging transition economies such as China, Viet Nam, and Cambodia provided more opportunities for such investment. Outside Asia, countries like Mexico and Central and East European countries were also emphasized because of their proximity to the USA and the EU. Private companies as well as Government Link Companies (GLCs), with the support of such institutions as the EDB, were encouraged to take advantages of these opportunities. The EDB also arranges training schemes for managers under its Initiatives in New Technology (Rationalization) Programme. At the end of 2005 Singapore’s direct equity investment abroad amounted to about S$154 billion, a substantial jump over the 1990 level of S$13.6 billion. Over this period equity investment has grown by more than 20% per year with the exception of 1998 when there was a contraction as a result of the Asian Financial Crisis. The total direct investment that includes net lending to overseas affiliates amounted to S$181 billion in 2005 of which S$25 billion went to China and another 15 billion to Malaysia.

In terms of returns the factor income of Singapore’s from the rest of the world was about 11% of GDP in 2003 and 2004. Obviously, these returns were miniscule in relation to what accrues to foreign residents and institutions in Singapore. As a result Singapore’s GDP remains higher than the GNP.

Under the service-hub drive, Singapore is aiming at moving into non-traditional service areas as quickly as possible because the traditional areas such as aviation, logistics, finance and tourism are also facing intense competition form its regional competitors. For example, Singapore’s attraction to tourists primarily lies in its aviation hub status, a stopover for many tourists who are on the way to more popular tourist destinations in the region. There is a strong correlation between tourism in the region and in Singapore.

Moreover, the average length of stay for tourists in Singapore is only about three days as opposed to about two weeks in Thailand. As these competitors improve their aviation services and coupled with their relatively cheep retail shopping Singapore may loose a large proportion of its “stop-over” tourists. As for financial services, Shanghai is trying to capture a large chunk of the pie. The major obstacle to Shanghai in this regard is its serious pollution problem. As for port services, Malaysia’s Tanjong Pelapas port made Singapore rethink its approach to managing the port.

As with the manufacturing sector, the intense competition in the traditional service sector has prompted Singapore to move into non-traditional services quickly before the competitors catch up. Capitalizing on Singapore’s English speaking environment, the Government has focused on developing two key areas; on making Singapore a “global schoolhouse” and on developing Singapore as a medical hub for various treatments. As a learning center in the region the Government is planning to attract at least 150,000 international students by 2015 (The Straits Times, March 24, 2007). The country is in fact well on the way to achieving or even surpassing this target. In 2006 Singapore hosted nearly 80, 000 international students. This was a 46% increase over the 2003 figure. Students came from more than 120 countries but the majority was from China, which now has overtaken the traditional sources, Malaysia and Indonesia. This sector’s contribution to the economy was about 3.8% of GDP or about S$8 billion in 2006. The Government’s aim is to increase this to 5% of GDP by 2015. The Government launched the roadmap for this endeavor in 2002 as recommended by the Economic Review Committee to tap on Singapore’s English speaking advantage, high education standards, cosmopolitan character, global connectivity, safe environment, and multi-lingual society.

About 20 reputed foreign academic institutions have been operating in Singapore in early 2007 and the Singapore Tourism Board (STB) has been holding road-shows in many cities to promote Singapore both for tourism and other services.

Part IV. International competitiveness.

Maintaining international competitiveness has always been a priority concern of policy makers because Singapore’s sustained growth depends critically on international factor inflows and external trade. The Government has been addressing this at two levels; one is by containing cost pressures during downturns and the other is through long run productivity improvements.

The Government’s approach to addressing the short-run cost competitiveness has been both direct and indirect. As will be discussed in the next section, the exchange rate policy is geared towards containing imported inflation. A key policy tool that the Government has used in direct interventions is the adjustments to the CPF contribution rates. To combat the 1985/86 recession the Government slashed the employer’s CPF contribution rate from 25% to 10% and retained the employee’s contribution rate at 25%. As the economy gained its growth momentum the employer’s rate was adjusted steadily upward and the employee’s rate was adjusted downward to reach 20% each by 1994. In response to the Asian Financial Crisis the Government again cut the employer’s rate to 10% in 1999. This was later restored to 16% but cut again to 13% after the SARS episode. In July 2007 this rate went up to 14.5% again. The cost cutting packages included many other measures such as cutting the utility rates and tax rebates to companies.

The Government intervenes indirectly to reduce wage pressures by controlling the inflow of foreign workers. Apart from this, a unique institutional feature that Singapore has put in place to make wages flexible downward is to attach a variable component to the wage package. The variable component can go up and down depending on the performance of the company and the economy. On taking the cue from the public sector many private companies have adopted this adjustable wage system.

Gaining long run competitiveness through productivity improvements is a challenge that the Government has been trying to address since early 1980s. Education and skill developments and restructuring the economy towards high value added industries have taken priority in recent years. The R&D thrust discussed earlier is a concerted effort in productivity improvements. When labour productivity is measured as value added per worker Singapore’s productivity growth rate has been impressive with the exception of the turbulent period between 1997 and 2004. Overall the growth rate of GDP per worker has been about 4% per year since 1980. However, the value added per worker overstates the productivity gains since Singapore (and East Asian) workers tend to work longer hours compared to the OECD counterparts. In the absence of quality data on hours worked it is difficult to assess these productivity trends. Nevertheless, recent data published by the Department of Statistics show that value added per manhour has grown by about 3% per year between 2000 and 2006.

Part V. Monetary system

In June 1967, nearly two years after independence, Singapore broke away from the currency union with Malaysia and Brunei and established its own currency board (Board of Commissioners of Currency, Singapore – BCCS) and issued its own currency, the Singapore dollar. Until 1973 the Malaysian ringgit, Brunei dollar and Singapore dollar were interchangeable at par. In June 1973, when Singapore dollar was floated, it was delinked from the Malaysian ringgit but remained exchangeable at par against the Brunei dollar. Until the BCCS was merged with the Monetary Authority of Singapore (MAS) in October 2002 the BCCS was the issuer of the Singapore dollar. The MAS, which was established in 1971, is Singapore’s de facto central bank and the regulator of the banking and financial institutions. In 1981 the Government of Singapore Investment Corporation (GIC) was established to manage and invest long-term government reserve assets, a function that MAS handled earlier.

Singapore is among the top ten most sophisticated financial markets in the world. Over the years, MAS liberalized its rules and regulations on the financial market enabling it to capture an increasing proportion of world’s financial transactions. Except for prudent regulation of the banking and financial system and money market operations for maintaining liquidity in the financial system the MAS does not engage in controlling the interest rates or the money supply. The main monetary policy instrument that the MAS uses is the exchange rate to control imported inflation.

Interest rates in Singapore closely follow the US rates and the money supply fluctuates in response to demand. With the tightening of the US monetary policy in 2006 the 3-month US$ SIBOR rose steadily to reach 5.36% by the end of the year. The domestic 3-month interbank rate followed this trend closely and settled to 3.44% by the end of the year. The longer term interest rates also followed a similar trend; the benchmark 10-year Singapore Government Securities (SGS) rate settled to 3.04 by the end of 2006. The retail interest rates, on the other hand, remained very stable with the average prime lending rate at 5.33% and the deposit rates below 1%. With 1% price inflation, the real interest rates on deposits were negative.

Part VI. Fiscal policy

The pivotal role the public sector has played in Singapore’s transformation is well acknowledged. Despite such heavy involvements, based on the philosophy of fiscal prudence, the Singapore Government has kept both government revenue and expenditure at relatively low levels (around 15% of GDP) and yet generated healthy and persistent budget surpluses. On the revenue side, however, the Government has adopted an unconventional accounting method by excluding two items, receipts from the sale of land and capital goods and the net investment income generated by investing government reserves. Only up to 50% of the latter is included in the budget. If these items are taken into account, the actual budget surplus would be much larger than the reported one. For example, in 2005 the reported budget surplus was S$0.43 billion whereas the actual surplus would have been as high as S$10 billion. Although the reported surplus has varied from -2 to 8 percent of GDP over 1990-2005 the adjusted surplus remained positive and varied from 3 to 19 percent of GDP. These surpluses have yielded a robust fiscal position for Singapore with total public assets standing at $437 billion by the end of March 2005.

 

6.1 Tax Policy

In general, the fiscal measures have been pro-business. The corporate tax rate has come down steadily from 40% prior to 1986 to 20% in 2005. Faced with competitive pressures from economies like Hong Kong where the corporate tax rate as of 2007 was 17.5% and other emerging economies with even lower rates, the Singapore Government announced a further reduction of its corporate tax rate to 18% to be effective from the fiscal year 2008. Business firms also receive many other incentives such as investment tax credits, accelerated depreciation allowances and firm specific benefits that would reduce their tax burden substantially.

The Government also reduced the personal marginal income tax rate steadily over the years to enhance work effort. The highest marginal income tax rate in 1980 was 55% for assessed income exceeding S$600,000. In 2007 this was 20% for assessed income exceeding S$320,000. The income-share weighted average marginal income tax rate has come down from about 10% in 1980 to about 6% by 2007. Effectively, an average Singapore worker pays very little income tax compared to the OECD counterparts. Obviously this blurs the picture since there are many other tax and non-tax charges including the goods and services tax (GST) that would add up to a much higher effective tax rate. Moreover, Singapore does not have a social welfare network similar to that of many OECD countries and only recently has the Government come to address this issue openly.

Corporate income tax constituted the largest revenue item in 2006 accounting for 27.5% of the total revenue followed by personal income tax with 15.6% and GST with 13.0%.

The remaining 43.8% was generated from other tax and non-tax charges. On the personal income tax side, there are rebates and deductions, the largest deduction being the CPF contributions. Moreover, only about a third of the labor force pays income taxes. Therefore, to offset the reduction in income tax revenue resulting from reduced corporate and personal income tax rates the Government has been raising the GST from time to time. The GST was introduced in April 1994 and the initial rate was 3%. Then it went up to 4% and 5%. In July 2007 the GST rate went up from 5% to 7%. Eventually the GST may come to prominence as a major source of government revenue.

Among other revenue items, two are somewhat unique to Singapore. One is the foreign worker levy (introduced in 1980) that the Government uses to regulate the inflow of lows killed foreign workers and thereby the market wage rate. The employer has to pay the levy to the Government when they employ low-skilled workers . The other revenue item is motor vehicle taxes that the Government uses to regulate the vehicle population in Singapore. This involves taxes and charges on both ownership and usage. The charges on the ownership side include a market determined price of Certificate of Entitlement (COE – introduced in May 1990), import duties (Singapore is largely duty-free), registration fees, GST and annual road taxes. On the usage side are fuel taxes, parking fees, and road charges based on an electronic road pricing system. Cars in Singapore are the most expensive in the world and as a result owning a car has become a status signal. On the other hand, the peak-our traffic congestion in Singapore is the lowest among the rich cities in the world.

6.2 Expenditure Policy

On the expenditure side government consumption expenditure constitute about 10% of GDP and investment expenditure about 4%, most of which goes to infrastructure developments. Given the high savings and import leakages the multiplier effect of government expenditure in Singapore is extremely low. Nevertheless the Government uses infrastructure spending and off-budget packages as counter-cyclical measures.

Obviously infrastructure spending entails more long-run beneficial effects that are not easily measured. Among the key expenditure items in Singapore lies defense expenditure. In 2006 defense expenditure accounted for 33% of the total expenditure (the single largest expenditure item) and about 5% of GDP. Although some quarters in Singapore consider such high spending on defense as a waste the Government’s position is that it is a premium that needs to be paid to sustain Singapore’s progress; security cannot be taken for granted. What was conspicuously absent in Singapore budget accounts was (welfare) transfers.

The Singapore Government has been averse to a welfare state from the beginning. The Government considers that welfare payments not only drain fiscal resources but also erode work ethics and create an entitlement mentality. The basic philosophy of the Government has been to provide equal opportunity for every individual to enhance his/her human capital and become self-reliant. Individual welfare is left to himself/herself and to the family and the community. Government subsidies are designed essentially along this line. Public education is almost free upto the university level. Public housing is provided at highly subsidized rates. Healthcare is basically a co-pay system but it is also subsidized for low income groups; subsidies in public hospitals range from 80% in class C wards to 20% in class B1 wards. Beyond this there has hardly been any social welfare until recently.

With changing demographics, in particular with aging population, and increasing income disparities the Government has begun to seriously reconsider its stand on social welfare. Since the mid 1990s the Government has put in place some special transfers on a piecemeal basis. Since most of these transfers were on one-off basis the amount of transfers have jumped up and down in different years. For example, between 1998 and 2007 the lowest was S$52 million in 1998 and the highest was S$ 5,264 million in 2001. A transfer that the Government has made mostly on a regular basis was CPF top-ups for Singapore citizens.

For higher income groups the Government introduced a Medishield Plus scheme on an opt-in basis. For the elderly who may need long-term care the Government introduced an Eldershiled scheme. By and large healthcare in Singapore is a private responsibility. The Government claims that it incorporates the best features of the American insurance model and the UK taxation model.

The CPF now consists of three accounts, ordinary, special, and medisave. The special account is meant for retirement and as mentioned above the medisave account is for medical expenses. Over the years the Government liberalized the usage of the CPF funds in the ordinary account for other purposes such as for house mortgages and some approved investments. The adequacy, rather the non-adequacy, of CPF for retirement and healthcare is a hotly debated topic in Singapore. Some have argued that the CPF is a mortgage finance scheme and not a pension scheme. The money locked-up in an illiquid house is not available for retirement and the discretionary savings among low income groups are virtually zero.

To help the low income Singaporeans who are mostly older workers the Government in introduced, instead of “welfare”, a “workfare” bonus scheme. Instead of an unemployment allowance an individual receives the workfare allowance only if he/she makes an earning. In the 2007 Budget the Government expanded the workfare scheme under the Workfare Income Supplement (WIS) program and introduced it more as a permanent feature. These transfers (somewhat similar to the US earned income tax credit scheme) depend on age, income level and whether or not the recipient had an employment at least for three months within the six month period prior to the claim. Again to save more for retirement most of the workfare transfers are made to the individual’s CPF account; the Government in 2007 set the cash to CPF ratio at 1:2.5.

Although the WIS was a welcome move, setting aside too much in the CPF was seen as “not much help” for the poor who are struggling with their daily subsistence. The Government’s stand on this is to set aside more funds to help these people upgrade their skills and improve their earning capacity. At present, there are some proposals that are being discussed to address old-age social security and healthcare in Singapore.

Part VII. Medium term prospects

The steady high growth era of Singapore ended with the Asian Financial Crisis. Since then the economy has become more vulnerable to shocks and growth rates have become more volatile. There are two possible ways to stabilize the growth rate. One is to build up the consumption expenditure share of GDP from its current 40% to about 60%. Given that property and car prices are many folds higher than the affordable income levels, further rise in these prices strain the households and they cut back on consumption to pay up loans and to build up some savings. Instead of bubbles in the property market, if property prices move on at the rate of per capita income growth it is likely that the consumption share in GDP will pick up as it was observed after 1996. Given the limited land space in Singapore there is nothing much can be done to reduce the car population and to keep the prices down.

The other counteracting effect is likely to emerge from the new services drive discussed earlier. Most of the service industries in Singapore had a close link with manufacturing activities. As a result, business cycles in manufacturing created similar cycles in services.

With branching off into new service areas that are not heavily linked to manufacturing the synchrony in the business cycles in manufacturing and services may be reduced and even reversed. This may help in reducing the volatility in growth to some extent.

Despite the possibility of volatile growth pattern, medium term growth prospects for Singapore remains bright. Singapore has been entering the emerging markets like China and India quickly. Under some highly plausible assumptions like Singapore’s trading partners grow by at least 4% per year, and barring unforeseen debilitating shocks, simulation studies show that Singapore could grow on average by about 6-7% per year over next 10 to 15 years.

 

Considering  the present economic situation in  our country, it is possible to follow the example of  Singapore. The experience of this country, which used to be a post-colonial country for a few decades and became a modern highly developed state, can be very instructive and helpful for our state. After all the patterns of economic success are quite simple and clear: the desire to work efficiently, to offer the world new and popular products and services, elimination of corruption is severe and most importantly – professional and patriotic government that is willing and able to work honestly and efficiently for the benefit of their  country and citizens.

But unfortunately many of us believe that economic situation in Ukraine is so bad, that we can`t even dream about  economic miracle of Singapore. With this pessimistic belief which prevails in our society now, it is hard to argue. On the other hand, the experience of Singapore proves that the determination  to change the life of the country and people`s faith in the success of their homeland, the ability to forget about national, linguistic differences for the sake of prosperous modern state allowed in Singapore within a single generation make a breakthrough from the third world to first. This illustrative examples convincingly that making a decent future for Ukraine – is an ambitious task, which may be solved the modern generation. The investigation of Singapore`s economic model clearly shows that Ukraine has a great potential to overtake   Singapore`s rapid success.    

 

 

 

 

 

 

 

 

 

Сonclusion

The theme of the work was “Economic miracle of Singapore”. The aim was to analyse reason of its rapid  growth. To my mind, the aim was achieved. It was reviewed the general spheres of Singapore`s economy. It was also identified the application of what Singapore`s methods of managing the economy can be used in Ukraine. This  work is very topical and it is in field of  investigation by many economists.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

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12. http://www.lowtax.net/lowtax/html/singapore